1) China’s economy is not just slowing, it is entering a serious correction. The investment bubble that has been driving Chinese growth has popped, and there are no quick “stimulus” fixes left. There is the very real possibility of some form of financial crisis in China before year’s end.2) China is in the midst of a once-in-a-decade leadership transition that has not been going smoothly. The transition will take place, but it has paralyzed the Chinese leadership’s ability to respond to the country’s growing economic troubles. China’s leaders believe time is on their side; they do not “get” how serious and urgent the situation is, and that what has always “worked” is no longer working.3) China’s economic problems spell trouble for the U.S. on several fronts.
- First, China is flirting with devaluing its currency to boost exports—a move that will put it in direct conflict with Mitt Romney’s commitments on this issue.
- Second, China is already dumping excess capacity in steel and other products onto the export market, a tactic that is likely to inflame trade tensions and reinforce imbalances in the global economy.
- Third, in a worst case scenario, China may be tempted to provoke a conflict in the South China Sea to redirect popular discontent onto an external enemy.
China has had a run of good luck. But China's leaders do not understand that their good fortune is likely to change, given the level of corruption and outright criminality in high places within the government and country.
Most outside observers remain in a daze, infatuated by China's rapid rise, its rumoured capital reserves, and its rush to build shiny and dazzling -- although largely empty and soon to collapse -- infrastructure.
Investors want to be told how to make a lot of money in China, when that wave may have already broken.